While we have experienced minimal changes in the Canadian Accounting Standards for Not-for-Profit Organizations (ASNPO) over the past few years, the Accounting Standards Board has introduced new standards affecting not-for-profit organizations (NPOs) with tangible capital assets, intangible assets or those that hold collections effective for year-ends beginning on or after January 1, 2019.
The upcoming changes align with standards applicable to for-profit organizations.
The new accounting standards are as follows:
- Section 4433 – Tangible capital assets held by not-for-profit organizations (replaces section 4431)
- Section 4434 – Intangible assets held by not-for-profit organizations (replaces section 4432)
- Section 4441 – Collections held by not-for-profit organizations (replaces section 4440)
Smaller NPOs – i.e. those with average annual revenues of less than $500,000 in the current and preceding period – can chose not to apply the new sections 4433 and 4434 and only make certain disclosures. However, it is encouraged that smaller NPOs follow all of the sections’ requirements instead of electing only to make certain disclosures.
Once an NPO fails to meet the annual revenue criterion, it is expected that the NPO would follow all the requirements of these new sections, even if average revenues subsequently fall below $500,000.
Below is a summary of the key changes in the accounting standards.
Tangible and intangible capital assets held by an NPO
The new standards now provide guidance on how to determine the cost of a contributed tangible capital asset. The cost of a contributed tangible capital asset is deemed to be its fair value at the date of contribution plus all costs directly attributable to its acquisition, including installing it at the location and in the condition necessary for its intended use. In addition, NPOs will need to consider componentization, which is to separate tangible capital assets into their significant component parts, when practicable, and then amortize each component over the estimated useful lives of the separate components. Further, NPOs can now record amortization based on the greater of the cost less salvage value over the life of the asset or the cost less residual value over the useful life of the asset, where only the second option was available in the past.
Previously, a write-down was required when a tangible or intangible asset no longer has any long-term service potential to the organization. Now, the guidance is expanded to include language to specify that an impairment could be required when the asset no longer contributes to the NPO’s ability to provide goods or services or that the value of the future economic benefits or service potential associated with the asset is less than its carrying amount. A non-exhaustive list of six examples of conditions that could indicate a write-down, including significant adverse changes to the use of the asset, in legal factors or in the operating environment, is also included in the guidance. In addition, NPOs will need to consider partial impairments and not only full impairment. Should there be any write-downs, these are recorded in the statement of operations and cannot be reversed. In addition, disclosure is required related to the nature and basis of any write-down recognized.
The adoption of these sections are to be applied prospectively and there are a number of transitional provisions permitted in the year of adoption.
Collections held by an NPO
With the goal of providing more structure around the accounting for collections, the new section provides guidance on how to record and disclose collections, which are defined as works of art, historical treasures or similar assets. Collections are considered items that are rare or unique and therefore differentiate themselves from the characteristics of assets. A rare book in an NPO’s library or a unique painting displayed in the NPO’s offices would be considered part of a collection, however regular library materials or a generic painting would not meet the definition. NPOs would act as the custodian of the collection and therefore would be responsible for the direct care of the collection for public display, education or research.
Historically, NPOs had the option to capitalize collections. Now, this option has been removed and all collections are required to be recorded on the statement of financial position at either cost or nominal value. The cost of the collection would include the purchase price, fair value of contributed items and all other costs directly attributed to the acquisition. Costs in relation to caring for and conserving the collection are similar to repairs and maintenance and therefore are required to be expensed in the year incurred. The result of collections requiring conservation and maintenance costs throughout their life is that amortization cannot be recorded on collections.
A write-down is also necessary on a collection when events or changes indicate that the carrying value or costs of the collection exceed the fair value. A write-down may not be reversed and should be recorded in the statement of operations in the year identified. Additionally, when a collection not subject to an external restriction is disposed of, the difference between the carrying value and the proceeds is recorded to the statement of operations. For externally restricted collections the difference is recognized in accordance with section 4410 (Contributions – revenue recognition).
Finally, collections are disclosed separately on the statement of financial position and additional disclosure is required when a write-down is recorded in the statement of operations.
It is important to understand these new standards and be able to apply them within your organization. Consider the following next steps:
- Ensure all collections are recorded separately on the statement of financial position at cost or nominal value, which will likely require changes to your accounting or tracking system to ensure all items are appropriately recorded and disclosed;
- Consider whether componentization, being the separation of an asset into significant separable component parts, impacts the assessment of impairment on tangible capital assets, which will require more detailed lists of assets held by a NPO;
- Assess tangible capital assets, intangible capital assets and collections for impairment and record the write-down where necessary; and
- Assess transitional provisions that allow your organization to determine the method of recognition of your assets at the date of transition, which could require different information than the recognized amounts under the previous sections.